August 24, 2017

Santa Claus Rally and More

The sell-off today has managed to put the indices we follow near an oversold state. 1490 continues to act as strong overhead resistance and after struggling with the 1470 level for several days the S&P finally broke that support towards the end of the trading day. A lower open Monday will most likely take the S&P back down ot the 1460 level and into oversold territory. This is when the so-called “Santa Claus” rally could begin, if at all. There is certainly no better time to rally than off of oversold levels, right? Officially, the “Santa Claus” rally doesn’t begin unti lthe 21st, but I will talk about that in a bit. I will be watching how the market opens and reacts to the 1470 area in early trading Monday.

Could next week bring the whoosh down that many bears have been predicting for months. It certainly feels like it. Of course, no one really knows, but after watching every tick in the market this week I can tell you that every bull rally was quickly sold off by the bears. Typically, this is never a good sign. Futhermore, even with all of the selling the indices still have some room to move lower over the short-term. The last time we saw extreme oversold levels was during the correction in early November (Nov. 12th to be exact). Since that occurence the S&P (SPY) has only been able to rally a paltry 2.4%. Moreover the high of this recent rally formed a lower high than the previous two short-term rallies which means that a downtrend is in play.

Santa might actually step into an extremely oversold market. The timing couldn’t be better that is for sure. The “Santa Claus” rally comes on the 21st this year, the day of December Triple Witching  and a day that has seen the Dow higher 18 out of the last 26 years. Santa historically rides the bull onto the second day of the new year before heading back to the north pole. How the market performs during this small time frame is usually indicative of future intermediate to long-term performance, particularly if the bears are out to play.

Next weeks brings options expiration and December triple witching. According to the StocK Trader’s Almanac (makes a great stocking stuffer by the way) Triple-Witching week has witnessed higher weekly returns in the Dow 20 out of the last 22 years.

As for our Iron Condor strategy, the move lower today pushed our underlying SPX comfortably within our chosen range. This will be our fourth straight month of gains in the strategy and a perfect four-out-of-four since altering our strategy to using extremely wide ranges.

Worth a Read

Overbought/Oversold for December 14, 2007

S&P (SPY) – 39.3 (neutral)

Russell 2000 (IWM) – 33.2 (neutral)

Dow (DIA) – 39.4 (neutral)

Nasdaq 100 (QQQQ) – 38.1 (neutral)

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